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72

, , ... . . J range high-low

Market Facilitation Index = - - - =-;-

volume volume

The results of combining the change in tick volume and the Maricet Facilitation Index are interpreted as:

Market fodlrtatiofi Indeif

Up Up Confirmation of direction

Down Down False direaion, do not take tle

Down Up Poor entry Dming.approach with caoDo

Up Down Potencial new crend. end of old trend

SOURCES OF INFORMATION

In addition to the various references in this chapter, the following is a list of sources containing useful infonnation on volume:

Steven B. Achelis, Technical Analjsis from A to Z (Probus, 1995)

Colby and Meyers, The Encyclopedia of Technical Market Indicators (Dow Jones Irwin, 1988) CompuTrac Manual (Telerate, 1990)

Edwards and Magee, Technical Analysis of Stock Trends (Edwards and Magee, 1948) Dr. Alexander Elder, Trading for a Living (John Wiley & Sons, 1994) Omega TradeStation, Easj Language Manual (Omega Research, 1995) Martin J. Pring, Technical Analjsis Explained (McGraw-Hill, 199 I) Kenneth H. Shaken, Volume and Open Interest (Probus, I99I)



The crational point-and-fisure me&od calls for tiie use of a 3-box re\ersal uiat is. tiie ptiee must re\erse reetioti by an amount equal ro 3 boxes tiie most extreme box of tiie last eolunin before a new eolunin ean begin (it aetually must fill tiie -Ith box sinee tiie extreme box is left blank). Hie importanee of keeping tiie 3-box re\-ersal has ions been questioned by expetieneed point-and-fisure tiaders. it should be noted tiiat tiie net re\-ersal amount (tiie box size times tiie number of boxes in tiie re\-ersal) is tiie eritieal value. For example, a $4 box for gold vAth a 3-box re\-ersal means tiiat gold must re\-erse by $12 to incUeate a trend ehanse. Hie opposite eombination, a $3 box and a 4-box re\-ersal, would aetually signal a re\-ersal of trend at tiie same time. Hie proper selection is based on tiie subsequent sensiti\ity of tiie box size following tiie re\-ersal. Hierefore, a smaller box size may interpret tiie smallest ptiee mo\-ements as a continuation of tiie trend and ultimately capture more of tiie price move; it is considered tiie preferatie altemative. Hie chdec of box size and re\-ersal boxes \ 11 be considered later in more detml

Point-and-Figure Charting

Point-and-figure charting is credited to Charles Dow, who is said to have used it just prior to the turn of the twentieth centurj This method differs from ordinarj charting in three important ways:

1. it has simple, well-defined trading rules.

2. It eliminates price reversals that are below a minimum (box) value.

3. It has no time factor. As long as prices fail to change direction by the reversal value, the trend is intact.

When point-and-figure charting first appeared, it did not contain the familiar boxes of Xs and Os. The earliest book containing the subject is reported to be The Game in Wall Sfreet and How to Play it Successfully, published by Hoyle (not Edmond Hoyle, the English writer) in 1898. The first definitive work on the subject was by Victor de Villiers, who in 1933 published The Point and Figure Method of Anticipating Stock Price Movement. De Villiers worked with Owen Taylor to publish and promote a weekly point-and-figure service, maintaining their own charts; he was impressed by the simple scientific methodologj. As with many of the original technical sjstems, the application was intended for the stock market, and the rules required the use of every price change appearing on the ticker. The rationale for a purely technical sjstem has been told many times by now, but an original source is often refreshing. De Villiers said:

"The Method takes for granted:

1 . That the price of a stock at any given time is its correct valuation up to the instant of purchase and sales (a) by the consensus of opinion of all buyers and sellers in the world and (bl by the verdict of all the forces goveming the laws of supply and demand.

2. That the last price of a stock reflects or ojstalizes everjihing known about or bearing on it from its first sale on the Exchange (or prior), up to that time.

3. That those who know more about it than the observer cannot conceal their future intentions regarding it. Their plans will be revealed in time by the stocks subsequent action.

The unique aspect of the point-and-figure method is that it ignores the passage of time. Unlike bar charts, you do not make a single vertical maik and then move to the right a uniform distance. Each column of a point-and-figure chart can represent any length of time The measurement of a significant change in price direction alone determines the pattem of the chart.

The original figure charts were plotted with only dots or with the exact price in each box or with a combination of Xs and occasional digits (usually Os and 5s even, 5 boxes) to

Virt.TDeVillier.- The Point and Figure tbod-f Anticipatiue - M-veruents (Tra.ler Press New York 19(- 11 efiiut f 1 tionl.p S)

help keep the chart aligned. A geometric representation was also created by connecting the points in each column with a vertical line and closing the gap between columns with a crossbar on top for a reversal down and a bar at the bottom if the nest column goes up. This would later be called a swing chart. Charts using 1, 3. and 5 points were popular, in which each point represented a minimum price move. In the 5-point method, no entry was recorded unless ttie price



change spanned 5 points.

Point-and-figure charts, which are still commonly used on the floor of the Chicago Mercantile Exchange and the Chicago Board of Trade, are recorded to show the greatest detail. Each box represents the minimum allowable price move, and reversals of direction use the traditional Icebox criteria. Floor traders use the charts to show only the short-term sustained price moves and leave a lot to the interpretation of pattems.

PLOTTING PRICES USING THE POINT-AND-FIGURE METHOD

To plot prices on a point-and-figure chart, start with a piece of graph paper and made the left scale using a conveniently small price increment For example, eadi box may be set at $ I for gold and platinum, one-eighth of a point (4 ticks) for 30-year bonds. I for soybeans and silver, and so forth (see Figure II-I). The choice of a box size will make the chart more or less sensitive to changes in price direction, as will be seen in later examples. The smaller the price increment, the more changes in direction will be seen. This also corresponds to longer and shorter trends or major and minor trends. Therefore, a point-and-figure chartist looking for a longterm price movement will use a larger box size. Box sizes are often related to the current volatility of the maikets.

Once the graph paper has been scaled and the prices entered along the left side, the chartist can begin. The first box to be entered is that of the current closing price of the market. If the price of silver is 852.50 and a 1 box is being used, a mark is placed in the box beside the value 852. An X or an 0 is used to indicate that the current price trend is up or down, respectively. Either an X or 0 may be used to begin-after that, it will be determined by the method.

The rules for plotting point-and-figure charts are easily shown as a flowchart (Figure II-2). Preference is given to price movements that continue in the direction of the current trend. Therefore, if the trend is up (represented by a column of Xs), the new high price is tested first; if the trend is down, the low price is of greatest importance. The opposite price is checked only if the new price fails to increase the length of the column showing the current trend.

FIGURE II-I Point-and-figure chart.

FIGURE 11 -2 Point-and-figure daily rules.



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